Findings on Insurance Economics Reported by Investigators at York University (Optimal initiation of a GLWB in a variable annuity: No Arbitrage approach)
By a News Reporter-Staff News Editor at Insurance Weekly News -- Fresh data on Insurance Economics are presented in a new report. According to news reporting from Toronto, Canada, by VerticalNews journalists, research stated, "This paper offers a financial economic perspective on the optimal time (and age) at which the owner of a Variable Annuity (VA) policy with a Guaranteed Lifetime Withdrawal Benefit (GLWB) rider should initiate guaranteed lifetime income payments. We bypass issues related to utility, bequest and consumption preference by treating the VA as liquid and tradable."
The news correspondents obtained a quote from the research from York University, "This allows us to use an American option pricing framework to derive a so-called optimal initiation region. Our main practical finding is that given current design parameters in which volatility (asset allocation) is restricted to less than 20%, while guaranteed payout rates (GPR) as well as bonus (roll-up) rates are less than 5%, GLWBs that are in-the-money should be turned on by the late 50s and certainly the early 60s. The exception to the rule is when a non-constant GPR is about to increase to a higher age band, in which case the optimal policy is to wait until the new GPR is hit and then initiate immediately. Also, to offer a different perspective, we invert the model and solve for the bonus (roll-up) rate that is required to justify delaying initiation at any age. We find that the required bonus is quite high and more than what is currently promised by existing products. Our methodology and results should be of interest to researchers as well as to the individuals that collectively have over $1 USD trillion in aggregate invested in these products."
According to the news reporters, the research concluded: "We conclude by suggesting that much of the non-initiation at older ages is irrational (which obviously benefits the insurance industry)."
For more information on this research see: Optimal initiation of a GLWB in a variable annuity: No Arbitrage approach. Insurance Mathematics & Economics, 2014;56():102-111. Insurance Mathematics & Economics can be contacted at: Elsevier Science Bv, PO Box 211, 1000 Ae Amsterdam, Netherlands.
Our news journalists report that additional information may be obtained by contacting H. Huang, York University, Schulich Sch Business, Finance Area, Toronto, ON M3J 2R7, Canada. Additional authors for this research include M.A. Milevsky and T.S. Salisbury.
Keywords for this news article include: Toronto, Ontario, Canada, North and Central America, Insurance Economics
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